Get Ready for Gateway 3.0

E-Commerce

Peter Lucas

Gateways have always had to reinvent themselves. Now, with e-commerce returning to double-digit growth and mobile payments poised for takeoff, they have to do it again—and this time with more competition than ever.

Since their inception about a decade ago, gateways have marketed value-added services, such as fraud detection and online shopping carts, as a way to boost revenue and differentiate themselves from transaction processors with a less robust menu of e-commerce services.

The value-added play was a natural choice for gateway providers. At their core, gateways are merely pipelines that route transactions between merchants and their processors. It’s a price-sensitive, low-margin, commodity business.

Pitching real-time fraud detection to e-commerce merchants was a natural play for gateways, because of the immense risk and liability issues fraud poses for them. Then, over time, major gateways expanded their offerings to include shopping carts and virtual terminals.

Now, with processors beefing up their e-commerce services, e-commerce merchants looking to expand internationally, and merchants moving into the mobile channel, gateway providers once again sense an opportunity to expand their value-added playbook. The window of opportunity may be small. More and more vendors are entering the gateway business, including established players from other parts of the e-payments business.

The new breed of gateway services is centered on back-office functions, such as currency conversion, inventory management, and merchant-accounting applications. The aim is to provide e-commerce and multichannel merchants with a suite of payment-related applications that position gateways as single-source application providers, and in turn opens up new revenue streams.

Redundant Infrastructure

For instance, Scottsdale, Ariz.-based Apriva, a provider of end-to-end wireless transactions and information-messaging solutions, offers merchant billing as part of its gateway services. The service, for which Apriva charges a per-transaction fee in addition to a monthly fee, tracks a merchant’s daily card transactions.

The transaction data are formatted and sent to the merchant-acquiring bank. Settlement data returned from the acquirer are formatted and downloaded to the merchant’s accounting system.

“Adding more services, such as inventory management, not only helps gateway providers compete more effectively, but generates new sources of revenue because they can charge for these services,” says Adil Moussa, a senior analyst with Boston-based Aite Group. “It’s a good strategy for them.”

Currency conversion is one of the lowest-hanging pieces of fruit gateways can pick from the tree of opportunity. With e-commerce becoming a saturated market in the United States, online merchants are looking to expand internationally to maintain the explosive growth they have enjoyed the past decade.

While e-commerce merchants can tweak their Web sites to show prices in the local currency, they need to program their host servers to automatically convert sales totals into the local currency at checkout. The inability to do so can frustrate shoppers and cause them to abandon the shopping cart because they do not know how much they will be changed in their local currency.

Currency conversion also enables e-commerce merchants to convert the amount of a transaction into U.S. dollars before sending an authorization request to processors.

“E-commerce merchants that want to sell internationally need to localize their business to foreign markets, and currency conversion plays a big role in that,” says Joel Mayer, senior vice president, corporate development for Long Beach, N.Y.-based gateway provider Planet Payment Inc.

System redundancy is also a critical part of an e-commerce merchant’s international-expansion strategy. Gateways that have back-up servers in each country where merchants do business, across geographic regions, and even globally reduce the risk of a merchant losing its connection to its processor due to a single point of failure.

“Gateways that want to support a merchant’s international expansion need a robust, redundant infrastructure,” says Carl Clump, chief executive of Retail Decisions Ltd., a London-based gateway that specializes in fraud detection. “If a gateway’s servers go down in one part of the world, retailers want to know that the load can be automatically shifted to servers in another part of the world so they don’t lose any sales because of the glitch.”

Ultimately, Clump foresees the need for gateways to build interfaces that allow them to connect with any acquiring bank or merchant around the world. “In China, for example, there are a lot of gateways being licensed, but they can only interface with local merchants and banks,” he says. “Gateways need to have a more international approach to their business.”

Service Bundling

Another big opportunity for e-commerce  merchants lies in mobile commerce. While many merchants think of m-commerce as an extension of e-commerce, where consumers come to the merchant’s Web site to make a purchase, gateways are developing applications that enable mobile merchants, such as service companies and tradesmen, to accept credit cards through smart phones and tablet computers.

Mobile-payment applications are a way for merchants to expand card acceptance beyond the traditional checkout lane. Many tradesman and home-service companies will accept credit cards when invoicing a customer, but those that require payment at the time of service are typically paid by check.

“The mobile channel represents a way for merchants that have field operations to expand their card acceptance,” says Bill Clark, who was until recently executive vice president for Apriva (Clark spoke to Digital Transactions before leaving the company). “As solutions providers, gateways write and certify the applications needed to initiate and complete a payment accepted through a mobile device.”

Apriva, which is aggressively moving into the mobile channel, has developed AprivaPay, a browser-based mobile payment application that allows merchants to process credit card transactions through Web-enabled mobile phones.

AprivaPay, which also supports card swipes and printers that can be plugged in to Apple Inc.’s iPhone and Motorola Mobility Inc.’s Android smart phone, is available for download through the iPhone and Android app stores. 

In addition to targeting mobile merchants, Apriva has developed an application that notifies vending-machine operators when a malfunction occurs, such as the machine overheating or not being able to accept currency or credit cards.

Apriva is loading AprivaPay on more than 500 mobile devices a month.

Enabling merchants to accept payments through mobile devices is only one piece of the mobile puzzle. Merchants also have a need to validate the mobile device being used to access their Web site. Device fingerprinting, a technique that tracks the signal emitted by a mobile device, tablet, laptop, or desktop computer, is expected to play a key role in the fraud-detection services gateways offer merchants that have created Web sites specifically formatted for the mobile channel.

Once a device has been fingerprinted, gateways can run its fingerprint through a database that matches it to the e-mail addresses, credit cards, and online transaction volume associated with the device. If any of those variables exceed the risk threshold established by the merchant, the transaction is either denied or flagged for manual review.

“Device fingerprinting is a best practice for m-commerce and e-commerce,” says Jeff Sawitke, senior vice president and chief product officer for Verifi Inc., a Los Angeles-based gateway and fraud-prevention services provider. “Merchants want to be able to reduce the fraud risk by establishing the characteristics of the device being used to initiate the purchase.”

As a specialist in fraud prevention and detection, Verifi is focused on adding new services that can help merchants further reduce fraud risk, such as tokenization.

Tokenization is a method by which account data for credit cards used to make an online purchase are stored by the gateway in a secure server. Each time the merchant submits a card authorization request, a one-time token using unique identification symbols that retain all the essential account information is created and returned to the merchant. With no actual card-account data stored on the merchant’s server, the method reduces the merchant’s liability if its server is hacked.

“There are a lot of value-added services gateways can add around fraud detection as well as back-office services,” adds Sawitke. “It’s one reason gateways are doing more bundling of services, because it’s a way for them to become a one-stop service provider for merchants, which many merchants indicate they want.”

‘We Have Work To Do’

Still, many of the largest gateways sell their value-added services through independent sales organizations, which means if ISOs are not excited about the services or do not fully understand their value to merchants, they will be disinclined to pitch them.

“ISOs need to understand the value of the gateway services they are selling to merchants before they can become excited about selling them,” says Ben Goretsky, chief executive of Los Angeles-based gateway provider USA ePay. “A gateway connection to a processor is only a small piece of the picture.”

Complicating this for ISOs is that a steady stream of new players is entering the gateway market. Some of these, such as VeriFone Systems Inc., have established credentials in other parts of the acquiring business (“Going for a Checkmate,” February).

San Jose, Calf.-based terminal maker VeriFone, which launched its PAYware Mobile application in January 2010, moved into gateway services as part of its strategy to diversify its revenue stream and generate more income from transaction-related services.

Services brought in $172.6 million in fiscal 2010 for VeriFone, up 47% from $117.1 million in 2009. System Solutions generated $828.9 million in revenues, an increase of 14% from $727.7 million a year earlier. So services accounted for 17% of revenues in fiscal 2010 compared with 14% the prior year.

In addition to PAYware, VeriFone’s services include VeriShield Protect for encrypting data, and electronic-payment and media services for taxicabs. All generate transaction-based revenues.

“VeriFone, and other gateways, understand that the point of sale is undergoing a transformation from traditional terminals to other devices,” says Aite Group’s Moussa. “To keep pace they need to evolve their business accordingly.”

Key to VeriFone’s gateway strategy is to partner with third-party software developers that create applications to enhance the payment experience for consumers and merchants.

“Our approach is not to create everything, but work with third parties that can create applications that enable ISOs to enrich their merchant relationships,” says Paul Rasori, senior vice president of global marketing for VeriFone.

Despite VeriFone’s brand recognition as a terminal maker, Rasori acknowledges the company does face some challenges establishing itself as a gateway-services provider. “There is no question we have work to do in that area,” he says. “But gateway services all start with fraud detection and that is an area we are well-positioned in with VeriShield.”

‘No Dead End’

As more gateway providers enter the market, payments experts expect a flurry of acquisitions by larger gateways looking to increase market share. “What larger gateways really want is the smaller gateway’s relationships with its ISOs or its merchant accounts, not its technology,” says Clark.

One major acquisition has already taken place. In April 2010, Visa Inc. announced it was acquiring online gateway and merchant acquirer CyberSource Corp. for $2 billion in cash. The acquisition of CyberSource is expected to bolster Visa’s position in e-commerce and mobile payments.

While concerns arose at the time of the acquisition that Visa intends to move back into merchant acquiring—31% of CyberSource’s revenues come from acquiring—Visa insists it has no such plans. Visa exited acquiring in 2005 when it sold its 50% stake in what was then called Vital Processing Services to Total System Services Inc.

“Consolidation will happen and we may even see deep-pocketed buyers from outside the payment industry that can bring more technical innovation to the gateway business, such as Google or Yahoo,” says Steve Sotis, president of eProcessing Network LLC, a Houston-based gateway. “These types of companies can bring a new perspective to the kind of services gateways can provide.”

While it is unclear whether a behemoth such as Google Inc., which has a foot in e-commerce with Google Checkout, has designs on being a gateway provider, what is clear is that technical innovation is the road to success for gateways looking to grow their business.

“Application innovation is going to be the difference-maker in the gateway business,” says Sotis. “The more help gateways provide merchants to run their business, the more likely merchants are to purchase those services from them. There is no dead end for gateways with fresh ideas.”